the taxation of trusts - bsp seminars · 2016-02-27 · terms and conditions 5—the taxation of...

March 2015 2014 edition

nb1504 Volume 1

By Costa Divaris

The Taxation of Trusts —the law & the return

The Taxation of Trusts —the law & the return by Costa Divaris

2014 Edition

Terms and conditions

5—The Taxation of Trusts—March 2015—© C Divaris Bsp Seminars® Gauteng SA


User rights This work is made available subject to the author’s and publisher’s copyright and nonexclusive user rights granted to you to use it solely for your personal or professional purposes and not to distribute it in any form. For these limited purposes only, the copying and adaption of the specimen letters included here is specifically permitted.

Electronic version The electronic version of this work is available by way of e-mail or hyperlink in the form of a PDF file. By supplying the publisher with your e-mail address, you agree to receive e-mail notifications of forthcoming seminars, publications and related offers from BSP Seminars®. To unsubscribe at any time, send an e-mail with the subject ‘No more e-mail’ to [email protected]. Should you be a subscriber, such an e-mail will also terminate your free subscription to the Tax Shock, Horror newsletter.

Further copies Apart for the purposes of the eponymous seminar for which these notes were developed and printed, this work is otherwise available in electronic format only. Should you require a further or printed and bound copy of this work, please contact the publisher.

Provenance, edition and product number Product number in the BSP Seminars® Store of this 2014 edition ver 2: nb1504. This work is based upon ‘Trusts & Tax—Case & Statute Law’ vol I (2012).

Disclaimer This work is not intended to constitute advice on the topics covered. The views expressed are those of the author and publisher. While reasonable care has been taken to ensure the accuracy of this publication, the author and publisher expressly disclaim all and any liability to any person relating to anything done or omitted to be done or to the consequences thereof in reliance upon this work, and do not accept responsibility for any loss or damage that may be sustained as a result of reliance by any person on the information contained herein. In particular, anyone who may be affected by statutory provisions dealt with in this work is strongly advised to refer to the relevant Government Gazette as originally published.

mailto:[email protected]�



Copyright ©2015 Costa Divaris/The Electronic Publishing Corp CC (referred to here as ‘the author’ and ‘the publisher’ respectively) Gauteng South Africa. This work is copyright under the Berne Convention. In terms of the Copyright Act 98 of 1978 and subject to the user rights detailed above, no part of this work may be reproduced or transmitted in any form or by any means, presently known or that may be devised, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without permission in writing from the publisher.

BSP Seminars®, Knowledge in Business® and Law Lookup® are registered trademarks.

Publisher The Electronic Publishing Corp CC (C Divaris). Bsp Seminars® is a division of The Electronic Publishing Corp cc. 12 Eshowe Street Paulshof Extension 10. Telephone 011 234 2434. Fax-to-e-mail 086 515 0955. Postnet Suite 72 Private Bag X87 Bryanston 2021. Business and Seminar Manager: Lesley Byrne. Contact Lesley Byrne: 082 854 2238; [email protected]. Contact Costa Divaris: Mobile 083 677 3333; [email protected].

Latest legislation upon which this work is based The Income Tax Act 58 of 1962, as last amended by all amending tax acts up to and including the Tax Administration Laws Amendment Act 44 of 2014 (20 January 2015).

ISBN 978–0–928221–62–6



Stylistic conventions—text


Stylistic conventions—text

This work follows all of the conventions set out in the latest edition of the Bsp Stylebook (C Divaris, DS McAllister), a free publication.

Legislative or contractual elements that are expressly and formally defined are referred to as terms, and are embraced, when necessary, by quotation marks. Other words (single words) and expressions (a collection of words) that are effectively defined or are used by me as personal terms of art are shown, when necessary, in italics, without quotation marks. Thus ‘gross income’ but hidden definition.

Otherwise, quotation marks are used purely to indicate a formal, verbatim quotation arising within the text. When a quotation appears separately from the text and indented, no quotation marks are used, while paragraph-indentations are dispensed with in the first line of the quotation and in every first line following an interruption of the quotation by indented or hanging material. Tables might not necessarily follow these rules.

Inside a quotation, quotations within the text of the quotation are embraced by single quotation marks and quotations within those quotations with double quotation marks, subject to recycling should the nesting continue. Quotations shown separately from the text of a quotation are presented without quotation marks but subject to a further indentation.

Legislative material included here is reproduced from publicly or commercially available consolidations, rendered in my own ‘value-added’ style and updated by me where necessary to render the text fully up to date with all amending acts dated 2014. Each extract is followed in small print by a note indicating the amending act under which it was first enacted or last amended.

Where lists of defined terms are provided, no recognition is given to terms defined in the Tax Administration Act but applying also to the Income Tax Act.

Any extracts from the Tax Shock, Horror newsletter reproduced here are reproduced in their form as originally published and thus may not be fully up to date.

Stylistic conventions—legislation


Stylistic conventions—legislation

Identifier Act, provision number (usually section, subsection; paragraph, subparagraph)

Dates, periods, percentages, fractions Rendered in bold

Outside parties Rendered in italics

Cross-references Restated in short form within square parentheses

Acts, self-references, Schedules, Parts Underlined

Defined words within quotation marks Rendered in bold

Defined words without quotation marks (‘as defined in’) Rendered in bold italics

Quasi-defined words (‘as contemplated in’, ‘referred to’, ‘as defined in’ ‘as determined by’) Rendered in bold italics

Apparent errors Either rectified within square parentheses or correction suggested within square parentheses and indicated by question mark

Extracts from explanatory memoranda Rendered in small print

Commentary, headed ‘Legislative history’, boxed, italicized Details and effective date of amendment

Commentary, headed ‘Past wording’, boxed, italicized Immediately preceding text of amended legislation

Contents—chapters


Contents—chapters

Click on an item to go to that page. Terms and conditions .......................................................................................... 5 Stylistic conventions—text ................................................................................. 7 Stylistic conventions—legislation ...................................................................... 9 Contents—chapters........................................................................................... 11 Contents—extracts from the act (ITA) ............................................................... 15 Contents—extracts from the act (TAA) ............................................................. 17 Contents—commentary .................................................................................... 19 Contents—sections & subsections .................................................................... 21

Chapter 1 ........................................................................................................ 29 The tax base ...................................................................................................... 29

Normal tax: the charging provision ................................................................ 29 Section 1(1) sv ‘normal tax’, s 5(1) ............................................................. 29 Section 1(1) sv ‘year of assessment’ ............................................................ 32

Normal tax: the tax base ................................................................................. 33 Section 1(1) sv ‘taxable income’ ................................................................. 33 Section 1(1) sv ‘gross income’ .................................................................... 35 Section 1(1) sv ‘gross income’, para (n) ...................................................... 37 Section 8(1)(a)(i) ......................................................................................... 39 Section 26A ................................................................................................. 40 Paragraph 2, 8th Sch ..................................................................................... 41 Section 22(1), (2) ......................................................................................... 43 Section 1(1) sv ‘Republic’ ........................................................................... 45

Normal tax: imposition .................................................................................. 47 Section 1(1) sv ‘person’ ............................................................................... 47

Chapter 2 ........................................................................................................ 55 Residence.......................................................................................................... 55

The decider between worldwide and source-based taxation .......................... 55 Section 1(1),‘foreign investment entity’ ...................................................... 72

Chapter 3 ........................................................................................................ 75 Source ............................................................................................................... 75

A concept of as much interest to residents as to nonresidents ........................ 75 Section 1(1),‘gross income’, para (n)(ii) ...................................................... 78 Section 9(2) .................................................................................................. 85 Section 9(3) .................................................................................................. 88 Section 9(4) .................................................................................................. 88

Chapter 4 ........................................................................................................ 99 Tax rates for trusts ............................................................................................ 99

Special trusts v ordinary trusts ....................................................................... 99 Section 1(1) sv ‘year of assessment’ ............................................................ 99 Section 1(1) sv ‘normal tax’, s 5(1) ........................................................... 100 Section 1(1) sv ‘taxable income’ ............................................................... 104 Section 26A ............................................................................................... 104 Section 1(1) sv ‘taxable capital gain’, para 10, 8th Sch .............................. 105

Contents—chapters


Paragraph 8 8th Sch .................................................................................... 106 Chapter 5 ...................................................................................................... 109

What is a trust? ............................................................................................... 109 Common-law and fiscal trusts, trustees and beneficiaries ............................ 109

Section 1(1) sv ‘trust’ ................................................................................ 113 Section 1(1) sv ‘trustee’ ............................................................................. 117 Section 1(1) sv ‘beneficiary’ ...................................................................... 118

Chapter 6 ...................................................................................................... 123 The trust as taxpayer ....................................................................................... 123

The trustees, acting jointly, are the true fiscal actor ..................................... 123 Representative taxpayer—under the Income Tax Act .................................. 129

Section 1(1) sv ‘representative taxpayer’ ................................................... 129 Paragraph 13(7), 4th Sch ............................................................................. 133

Representative taxpayer—under the Tax Administration Act ...................... 135 Chapter 7 ...................................................................................................... 151

Special types of fiscal trusts ........................................................................... 151 The special trust ........................................................................................... 151

Section 1(1) sv ‘special trust’ .................................................................... 151 The trust as personal service provider .......................................................... 166 The closure rehabilitation trust ..................................................................... 177 Chapter 8 ...................................................................................................... 179

When the donor pays the tax .......................................................................... 179 Introduction .................................................................................................. 179 Income tax .................................................................................................... 185

Section 7(1) ................................................................................................ 185 Section 7(2), (2A), (2B), (2C) .................................................................... 187 Section 7(3), (4) ......................................................................................... 193 Section 7(5) ................................................................................................ 195 Section 7(6) ................................................................................................ 196 Section 7(7) ................................................................................................ 197 Section 7(8) ................................................................................................ 199 Section 7(9), (10), (11) .............................................................................. 200

Capital gains tax ........................................................................................... 203 Paragraph 68, 8th Sch ................................................................................. 203 Paragraph 69, 8th Sch ................................................................................. 205 Paragraph 70, 8th Sch ................................................................................. 207 Paragraph 71, 8th Sch ................................................................................. 208 Paragraph 72, 8th Sch ................................................................................. 209

Income tax and capital gains tax .................................................................. 211 Paragraph 73, 8th Sch ................................................................................. 212

Chapter 9 ...................................................................................................... 215 When the beneficiaries pay tax ....................................................................... 215

Income tax .................................................................................................... 215 Section 25B(1), (2) .................................................................................... 221 Section 25B(3), (4), (5), (6), (7) ................................................................. 223

Capital gains tax ........................................................................................... 226 Paragraph 80, 8th Sch ................................................................................. 229

Chapter 10 .................................................................................................... 233 General tax issues ........................................................................................... 233

Contents—chapters


Applying the law .......................................................................................... 233 Chapter 11 .................................................................................................... 245

Offshore trusts ................................................................................................ 245 Introduction .................................................................................................. 245 Income tax rules ........................................................................................... 248

Section 25B(2A) ........................................................................................ 248 Capital gains tax rules .................................................................................. 251

Paragraph 80(3), 8th Sch ............................................................................ 252 Responding to the rules ................................................................................ 254 Chapter 12 .................................................................................................... 261

Loans to and by trusts ..................................................................................... 261 Introduction .................................................................................................. 261 Loans as an act of liberality ......................................................................... 267 Chapter 13 .................................................................................................... 275

Trusts and other taxes and issues .................................................................... 275 Other taxes levied by the Income Tax Act ................................................... 275 Chapter 14 .................................................................................................... 283

The new trust return ........................................................................................ 283 Information to create the income tax return for a trust ................................. 283 Appendix ...................................................................................................... 287

Form ITR 12T .................................................................................................. 287

Contents—extracts from the act (ITA)


Contents—extracts from the act (ITA)

Click on an item to go to that page. From the Act 1—‘normal tax’ (ss 1(1), 5(1)) ................................................... 29 From the Act 2—‘year of assessment’ (s 1(1)) ................................................. 32 From the Act 3—‘taxable income’ (s 1(1)) ...................................................... 33 From the Act 4—‘gross income’, preamble (s 1(1)) ........................................ 35 From the Act 5—‘gross income’, para (n) (s 1(1)) ........................................... 37 From the Act 6—the taxable allowances plug-in (s 8(1)(a)(i)) ........................ 39 From the Act 7—the taxable capital gain plug-in (s 26A) ................................ 40 From the Act 8—application of the CGT (para 2, 8th Sch) ................................ 41 From the Act 9—the trading stock plug-in (s 22(1), (2)) ................................. 43 From the Act 10—‘Republic’ (s 1(1)) .............................................................. 45 From the Act 11—‘person’ (s 1(1)) .................................................................. 47 From the Act 12—‘company’ (s 1(1)) .............................................................. 49 From the Act 13—‘foreign investment entity’ (s 1(1)) .................................... 72 From the Act 14—source of recoupments (s 1(1), ‘gross income’) ................. 78 From the Act 15—domestically sourced income-flows (s 9(2)) ....................... 85 From the Act 16—pensions & annuities deemed services (s 9(3)) ................... 88 From the Act 17—foreign sourced income-flows (s 9(4)) ............................... 88 From the Act 18—‘year of assessment’ (s 1(1)) ............................................... 99 From the Act 19—‘normal tax’ (ss 1(1), 5(1)) ............................................... 100 From the Act 20—‘taxable income’ (s 1(1)) .................................................. 104 From the Act 21—the taxable capital gain plug-in (s 26A) ............................ 104 From the Act 22—taxable capital gain (s 1(1), para 10, 8th Sch) ................... 105 From the Act 23—net capital gain (para 8, 8th Sch) ....................................... 106 From the Act 24—‘trust’ (s 1(1)) ................................................................... 113 From the Act 25—‘trustee’ (s 1(1)) ................................................................ 117 From the Act 26—‘beneficiary’ (s 1(1)) ........................................................ 118 From the Act 27—‘representative taxpayer’ (s 1(1)) ..................................... 129 From the Act 28—donations tax and representative taxpayers (s 61) ............ 132 From the Act 29—delivery of tax certificate (para 13(7), 4th Sch) ................. 133 From the Act 30—‘special trust’ (s 1(1)) ....................................................... 151 From the Act 31—‘personal service provider’ (para 1, 4th Sch) ..................... 167 From the Act 32—obsolete attribution rule (s 7(1)) ....................................... 185 From the Act 33—spousal attribution rules (s 7(2), (2A), (2B), (2C)) ........... 187 From the Act 34—diversion to minor child (s 7(3), (4)) ................................ 193 From the Act 35—undistributed income (s 7(5)) ........................................... 195 From the Act 36—revocable distributed income (s 7(6)) ............................... 196 From the Act 37—cession of income-streams (s 7(7)) ................................... 197 From the Act 38—diversion to nonresident (s 7(8)) ....................................... 199 From the Act 39—special rules (s 7(9), (10), (11)) ........................................ 200 From the Act 40—spousal attribution rules (para 68, 8th Sch) ....................... 203 From the Act 41—diversion to minor child (para 69, 8th Sch) ....................... 205

Contents—extracts from the act


From the Act 42—undistributed capital gain (para 70, 8th Sch) ..................... 207 From the Act 43—revocable distributed gain (para 71, 8th Sch) .................... 208 From the Act 44—diversion to nonresident (para 72, 8th Sch) ....................... 209 From the Act 45—attribution of income and gain (para 73, 8th Sch) ............. 212 From the Act 46—income of trusts v beneficiaries (s 25B(1), (2)) ................ 221 From the Act 47—deductions (s 25B(3), (4), (5), (6), (7)) ............................. 223 From the Act 48—gains of trusts v beneficiaries (para 80, 8th Sch) ............... 229 From the Act 49—distribution from nonresident trust (s 25B(2A)) ............... 248 From the Act 50—distribution from nonresident trust (para 80(3), 8th Sch) .. 252

Contents—extracts from the act (TAA)


Contents—extracts from the act (TAA)

Click on an item to go to that page From the Tax Administration Act 1—ss 1, 151: ‘taxpayer’ ........................... 135 From the Tax Administration Act 2—ss 1, 153(1): ‘representative taxpayer’ 136 From the Tax Administration Act 3—s 23: registered persons ...................... 140 From the Tax Administration Act 4—s 153(2): notification of status ............ 141 From the Tax Administration Act 5—s 153(3): taxpayer unrelieved ............. 142 From the Tax Administration Act 6—s 154: representative liability ............. 142 From the Tax Administration Act 7—s 155: personal liability ...................... 145 From the Tax Administration Act 8—s 169(2): recovery .............................. 145

Contents—commentary



Click on an item to go to that page. Commentary 1—ss 1(1), 5(1): significance of ‘normal tax’ ............................. 30 Commentary 2—ss 1(1), 5(1): significance of ‘year of assessment’ ................ 32 Commentary 3—s 1(1): significance of ‘taxable income’ ................................ 33 Commentary 4—s 5(1): the tax base ................................................................ 34 Commentary 5—s 1(1): ‘gross income’, structure of ....................................... 35 Commentary 6—s 1(1): para (n) of ‘gross income’ ......................................... 38 Commentary 7—s 8(1)(a)(i): the taxable allowances plug-in .......................... 40 Commentary 8—s 26A: the taxable capital gain plug-in .................................. 41 Commentary 9—para 2(1), 8th Sch: territoriality of the CGT ............................ 42 Commentary 10—s 22(1), (2): the trading stock plug-in ................................. 43 Commentary 11—s 1(1): significance of ‘Republic’........................................ 45 Commentary 12—s 1(1): significance of ‘person’ ........................................... 47 Commentary 13—s 1(1): significance of ‘company’ ....................................... 50 Commentary 14—associations, universitas, body of persons .......................... 51 Commentary 15—unincorporated associations & bodies of persons ............... 53 Commentary 16—universitas ........................................................................... 53 Commentary 17—s 1(1): structure of ‘resident’ ............................................... 55 Commentary 18—residence: the Kuttel case .................................................... 58 Commentary 19—Interpretation Note 3 on ordinarily resident ....................... 64 Commentary 20—Interpretation Note 6 on effective management .................. 66 Commentary 21—residency article in tax treaty with China ............................ 68 Commentary 22—s 1(1): ‘gross income’, para (n)(ii): source of recoupments 79 Commentary 23—s 9: identifying s 9(2) and (4) originating causes ................ 81 Commentary 24—Trust Property Control Act: ‘trust’.................................... 109 Commentary 25—Trust Property Control Act: ‘trust instrument’ .................. 111 Commentary 26—all the fiscal trusts, as ‘persons’ ........................................ 113 Commentary 27—s 1(1): significance of ‘trustee’ ......................................... 117 Commentary 28—s 1(1): significance of ‘beneficiary’ .................................. 118 Commentary 29—s 1(1): significance of ‘representative taxpayer’ ............... 130 Commentary 30—s 61: donations tax ............................................................ 133 Commentary 31—representative taxpayer as taxpayer .................................. 135 Commentary 32—what is a representative taxpayer? .................................... 137 Commentary 33—change of representative taxpayer ..................................... 140 Commentary 34—notification by representative taxpayer ............................. 141 Commentary 35—taxpayer remains on the line ............................................. 142 Commentary 36—representative liability ....................................................... 143 Commentary 37—personal liability ............................................................... 145 Commentary 38—recovery ............................................................................ 146 Commentary 39—s 1(1): significance of ‘special trust’ ................................. 152 Commentary 40—disability special trusts ...................................................... 153 Commentary 41—youth special trusts ............................................................ 154



Commentary 42—special income tax treatment for special trusts .................. 155 Commentary 43—special CGT treatment for special trusts ............................. 157 Commentary 44—special trusts for the disabled ............................................ 163 Commentary 45—para 1, 4th Sch: ‘personal service provider’ ....................... 167 Commentary 46—PSPs in the main body of the Income Tax Act ................... 169 Commentary 47—PSPs in the Fourth Schedule (PAYE) .................................. 173 Commentary 48—PSPs in the Sixth Schedule (micro-business) ..................... 174 Commentary 49—s 7(1): academics love this meaningless provision ........... 185 Commentary 50—spousal attribution rules .................................................... 190 Commentary 51—diversion to minor children ............................................... 194 Commentary 52—s 7(5): undistributed income ............................................. 195 Commentary 53—s 7(6): revocable distributed income ................................. 196 Commentary 54—s 7(7): cession of income-streams ..................................... 198 Commentary 55—s 7(8): diversion to nonresident ......................................... 200 Commentary 56—s s 7(9), (10), (11): special rules ........................................ 201 Commentary 57—para 68, 8th Sch: spousal attribution rules ......................... 204 Commentary 58—para 69, 8th Sch: diversion to minor child ......................... 206 Commentary 59—para 70, 8th Sch: undistributed capital gain ....................... 207 Commentary 60—para 71, 8th Sch: revocable distributed gain ...................... 209 Commentary 61—para 72, 8th Sch: diversion to nonresident ......................... 210 Commentary 62—para 73, 8th Sch: attribution of income & gain .................. 213 Commentary 63—s 25B(1), (2): income of trusts v beneficiaries .................. 221 Commentary 64—s 25B(3), (4), (5), (6), (7): deductions ............................... 224 Commentary 65—para 80, 8th Sch: gains of trusts v beneficiaries ................. 230 Commentary 66—s 25B(2A): distribution from nonresident trust ................. 249 Commentary 67—para 80(3), 8th Sch: distribution from nonresident trust .... 252

Contents—sections & subsections



Click on an item to go to that page. Section 1(1) sv ‘normal tax’, s 5(1) .................................................................. 29

ITA s 1(1) sv ‘normal tax’ ............................................................................... 29 ITA s 5(1) ........................................................................................................ 29 ITA s 6(1) ........................................................................................................ 30 ITA s 6A(1) ..................................................................................................... 31 ITA s 6B(2) ..................................................................................................... 31 ITA s 6quat(1), extract .................................................................................... 31 ITA s 6quin(1), extract .................................................................................... 31 ita s 64N(1) .................................................................................................... 31

Section 1(1) sv ‘year of assessment’ ................................................................ 32 ITA s 1(1) sv ‘year of assessment’ .................................................................. 32

Section 1(1) sv ‘taxable income’ ...................................................................... 33 ITA s 1(1) sv ‘taxable income’ ........................................................................ 33 ITA s 1(1) sv ‘taxable income’ ........................................................................ 34 ITA s 1(1) sv ‘income’ .................................................................................... 34

Section 1(1) sv ‘gross income’ ......................................................................... 35 ITA s 1(1) sv ‘gross income’, preamble .......................................................... 35 ITA s 1(1) sv ‘gross income’, para (i) ............................................................. 36 ITA s 1(1) sv ‘gross income’, para (ii) ............................................................ 36

Section 1(1) sv ‘gross income’, para (n) ........................................................... 37 ITA s 1(1) sv ‘gross income’, para (n) ............................................................ 37 ITA s 1(1) sv ‘taxable income’ ........................................................................ 38

Section 8(1)(a)(i) .............................................................................................. 39 ITA s 8(1)(a)(i) ................................................................................................ 39 ITA s 1(1) sv ‘taxable income’, para (b) ......................................................... 40

Section 26A ...................................................................................................... 40 ITA s 26A ........................................................................................................ 40 ITA s 1(1) sv ‘taxable income’, para (b) ......................................................... 41

Paragraph 2, 8th Sch .......................................................................................... 41 ITA 8th Sch para 2(1) ....................................................................................... 41 ITA 8th Sch para 2(2) ....................................................................................... 41

Section 22(1), (2) .............................................................................................. 43 ITA s 22(1) ...................................................................................................... 43 ITA s 22(2) ...................................................................................................... 43

Section 1(1) sv ‘Republic’ ................................................................................ 45 ITA s 1(1) sv ‘Republic’ .................................................................................. 45 MZA S 4 ........................................................................................................... 45 MZA S 5 ........................................................................................................... 45 MZA S 6 ........................................................................................................... 46 MZA S 7 ........................................................................................................... 46 MZA S 8 ........................................................................................................... 46

Section 1(1) sv ‘person’ .................................................................................... 47 ITA s 1(1) sv ‘person’ ..................................................................................... 47



IA s 2 sv ‘person’ ............................................................................................ 47 ITA s 1(1) sv ‘company’ ................................................................................. 49 ITA s 1(1) sv ‘company’, para (d) ................................................................... 50 ITA s 1(1) sv ‘resident’, with headings ........................................................... 55 ITA s 1(1) sv ‘resident’, structural representation, para (a)(i) ......................... 57 ITA s 1(1) sv ‘resident’, structural representation, para (a)(ii) ........................ 57 ITA s 1(1) sv ‘resident’, para (b) ..................................................................... 65 ITA s 1(1) sv ‘resident’, structural representation, treaty persons ................... 67 Republic of China, art 4 ................................................................................. 68 ITA s 1(1) sv ‘resident’, first proviso .............................................................. 70 ITA s 1(1) sv ‘resident’, structural representation, para (a)(ii) ........................ 70 ITA s 1(1) sv ‘resident’, structural representation, proviso (A) to para (a)(ii) 71

Section 1(1),‘foreign investment entity’ ........................................................... 72 ITA s 1(1) sv ‘foreign investment entity’ ........................................................ 72 ITA s 1(1) sv ‘resident’, structural representation, second proviso ................. 73 ITA s 1(1) sv ‘gross income’, extract, structural representation ...................... 77

Section 1(1),‘gross income’, para (n)(ii) .......................................................... 78 ITA s 1(1) sv ‘gross income’, para (n)............................................................. 78 ITA s 1(1) sv ‘dividend’ .................................................................................. 81 ITA s 24I(1), preamble .................................................................................... 81 ITA s 24I(1) sv ‘exchange difference’ ............................................................. 81 ITA s 24I(1) sv ‘exchange item’ ...................................................................... 82 ITA s 1(1) sv ‘foreign dividend’ ...................................................................... 82 ITA 8th Sch para 2(2) ....................................................................................... 83 ITA s 24J(1), preamble .................................................................................... 83 ITA s 24J(1) sv ‘interest; ................................................................................. 83 ITA s 8E(2) ...................................................................................................... 84 ITA s 9(1) ........................................................................................................ 84 ITA S 23I(1) sv ‘intellectual property’ ............................................................. 84

Section 9(2) ...................................................................................................... 85 ITA s 9(2), preamble ....................................................................................... 85 ITA s 9(2)(a).................................................................................................... 85 ITA s 9(2)(b).................................................................................................... 85 ITA s 9(2)(c) .................................................................................................... 85 ITA s 9(2)(d).................................................................................................... 85 ITA s 9(2)(e) .................................................................................................... 86 ITA s 9(2)(f) .................................................................................................... 86 ITA s 9(2)(g).................................................................................................... 86 ITA s 9(2)(h).................................................................................................... 86 ITA s 9(2)(i) .................................................................................................... 86 ITA s 9(2)(j) .................................................................................................... 87 ITA s 9(2)(k) .................................................................................................... 87 ITA s 9(2)(l) .................................................................................................... 87

Section 9(3) ...................................................................................................... 88 ITA s 9(3) ........................................................................................................ 88

Section 9(4) ...................................................................................................... 88 ITA s 9(4) ........................................................................................................ 88 ITA s 9(2)(a).................................................................................................... 89 ITA s 9(4)(a).................................................................................................... 89



ITA s 9(2)(f) .................................................................................................... 89 ITA s 9(2)(g) ................................................................................................... 89 ITA s 9(2)(h) ................................................................................................... 90 ITA s 9(2)(b) ................................................................................................... 91 ITA s 9(2)(b) ................................................................................................... 91 ITA s 9(4)(b) ................................................................................................... 91 ITA s 9(2)(c) .................................................................................................... 92 ITA s 9(2)(c) .................................................................................................... 92 ITA s 9(2)(d) ................................................................................................... 92 ITA s 9(4)(c) .................................................................................................... 92 ITA s 9(2)(e) .................................................................................................... 92 ITA s 9(2)(e) .................................................................................................... 92 ITA s 9(2)(i) .................................................................................................... 93 ITA s 9(2)(i) .................................................................................................... 93 ITA s 9(2)(j) .................................................................................................... 94 ITA s 9(2)(k) .................................................................................................... 94 ITA s 9(2)(k) .................................................................................................... 94 ITA s 9(4)(d) ................................................................................................... 95 ITA s 9(2)(l) .................................................................................................... 96 ITA s 9(2)(l) .................................................................................................... 96 ITA s 9(4)(e) .................................................................................................... 96

Section 1(1) sv ‘year of assessment’ ................................................................ 99 ITA s 1(1) sv ‘year of assessment’ .................................................................. 99

Section 1(1) sv ‘normal tax’, s 5(1) ................................................................ 100 ITA s 5(1) ...................................................................................................... 100 R&MA&ARLA 42 of 2014 s 2, extract ........................................................... 100 R&MA&ARLA 42 of 2014 Appendix I, extract ............................................. 101 R&MA&ARL Bill, 2015 s 3(1) ....................................................................... 102 R&MA&ARL Bill, 2015 Appendix I, extract ................................................. 102

Section 1(1) sv ‘taxable income’ .................................................................... 104 ITA s 1(1) sv ‘taxable income’ ...................................................................... 104

Section 26A .................................................................................................... 104 ITA s 26A ...................................................................................................... 104

Section 1(1) sv ‘taxable capital gain’, para 10, 8th Sch ................................... 105 ITA s 1(1) sv ‘taxable capital gain’ ............................................................... 105 ITA 8th Sch para 10 ....................................................................................... 105

Paragraph 8 8th Sch ......................................................................................... 106 ITA 8th Sch para 1 sv ‘net capital gain’ ......................................................... 106 ITA 8th Sch para 8 ......................................................................................... 106 TPCA s 1 sv ‘trust’ ......................................................................................... 109 TPCA s 1 sv ‘trust instrument’ ....................................................................... 111

Section 1(1) sv ‘trust’ ..................................................................................... 113 ITA s 1(1) sv ‘trust’ ....................................................................................... 113 ITA s 1(1) sv ‘person’ ................................................................................... 113 ITA s 1(1) sv ‘trust’ ....................................................................................... 113 TDA s 1(1) sv ‘person’ .................................................................................. 113 TDA S 1(1) sv ‘trust’ ...................................................................................... 113 VATA s 1(1) sv ‘person’ ................................................................................ 114 VATA s 1(1) sv ‘trust fund’ ........................................................................... 114



Section 1(1) sv ‘trustee’ .................................................................................. 117 ITA s 1(1) sv ‘trustee’ ................................................................................... 117

Section 1(1) sv ‘beneficiary’ .......................................................................... 118 ITA s 1(1) sv ‘beneficiary’ ............................................................................ 118 ITA s 1(1), preamble .................................................................................... 119 DELA s 1(1) sv ‘person’ ................................................................................. 123 ITA s 1(1) sv ‘person’ ................................................................................... 123 M&PRRA s 1(1) sv ‘person’ .......................................................................... 123 STTA s 1 sv ‘person’ ...................................................................................... 123 TDA s 1(1) sv ‘person’ .................................................................................. 123 VATA s 1(1) sv ‘person’ ................................................................................ 123 ITA s 1(1) sv ‘taxpayer’ ................................................................................ 124 VATA s 1(1) sv ‘vendor’ ............................................................................... 124 VATA s 7(1) ................................................................................................... 124 TDA s 2(1), extract ........................................................................................ 125 ITA s 61(a) .................................................................................................... 125 ITA 4th Sch para 1 sv ‘employer’ ................................................................ 126 VATA s 46(i).................................................................................................. 126 TDA s 3(1B) .................................................................................................. 127 ITA s 25D(3) ................................................................................................. 128

Section 1(1) sv ‘representative taxpayer’ ....................................................... 129 ITA s 1(1) sv ‘representative taxpayer’ ......................................................... 129 ITA s 1(1) sv ‘representative taxpayer’, para (c) ........................................... 130 ITA s 1(1) sv ‘representative taxpayer’, para (b) ........................................... 130 ITA s 1(1) sv ‘trustee’ ................................................................................... 130 ITA s 1(1) sv ‘income’ .................................................................................. 131 ITA s 1(1) sv ‘representative taxpayer’, proviso ........................................... 131 ITA s 1(1) sv ‘representative taxpayer’, partially rewritten ........................... 132 ITA s 61 ......................................................................................................... 132 ITA s 56(1)(l) ................................................................................................. 133

Paragraph 13(7), 4th Sch ................................................................................. 133 ITA 4th Sch para 13(7) ................................................................................... 133 TAA s 1 sv ‘taxpayer’ .................................................................................... 135 TAA s 151 ...................................................................................................... 135 TAA s 152 ...................................................................................................... 135 TAA s 1 sv ‘representative taxpayer’ ............................................................. 136 TAA s 153(1) ................................................................................................. 136 ITA s 1(1) sv ‘representative taxpayer’ ......................................................... 137 ITA 4th Sch para 1 sv ‘representative employer’ ........................................... 138 VATA s 46 ..................................................................................................... 138 TAA s 23 ........................................................................................................ 140 TAA s 234(a) ................................................................................................. 141 TAA s 234(b) ................................................................................................. 141 TAA s 153(2) ................................................................................................. 141 TAA s 153(3) ................................................................................................. 142 TAA s 154(1) ................................................................................................. 142 TAA s 154(2) ................................................................................................. 143 TAA s 1 sv ‘tax debt’ ..................................................................................... 144 TAA s 169(1) ................................................................................................. 144 ITA s 1(1) sv ‘representative taxpayer’, proviso ........................................... 144



TAA s 155 ...................................................................................................... 145 TAA s 169(2) ................................................................................................. 145 TAA s 1 sv ‘tax debt’ ..................................................................................... 146 TAA s 169(1) ................................................................................................. 146

Section 1(1) sv ‘special trust’ ......................................................................... 151 ITA s 1(1) sv ‘special trust’ ........................................................................... 151 ITA s 6B(1) sv ‘disability’ ............................................................................. 152 ITA s 1(1) sv ‘relative’ .................................................................................. 152 ITA s 9D(2A)(f) ............................................................................................. 155 ITA s 18A(1) ................................................................................................. 156 ITA s 18A(3A) .............................................................................................. 156 ITA s 37D(1), preamble ................................................................................. 156 ITA s 37D(2) ................................................................................................. 156 ITA 8th Sch para 1 sv ‘special trust’ .............................................................. 157 ITA 8th Sch para 5 ......................................................................................... 157 ITA 8th Sch para 6 ......................................................................................... 158 ITA 8th Sch para 7 ......................................................................................... 158 ITA 8th Sch para 10 ....................................................................................... 158 ITA 8th Sch para 44, preamble ....................................................................... 159 ITA 8th Sch para 44 sv ‘primary residence .................................................... 159 ITA 8th Sch para 45 ....................................................................................... 159 ITA 8th Sch para 47 ....................................................................................... 160 ITA 8th Sch para 48 ....................................................................................... 160 ITA 8th Sch para 49 ....................................................................................... 160 ITA 8th Sch para 50 ....................................................................................... 161 ITA 8th Sch para 53 ....................................................................................... 161 ITA 8th Sch para 59 ....................................................................................... 162 ITA 8th Sch para 82 ....................................................................................... 162 ITA 4th Sch para 1 sv ‘personal service provider’ ......................................... 167 ITA s 1(1) sv ‘gross income’, preamble ........................................................ 169 ITA s 1(1) sv ‘gross income’, para (cA) ........................................................ 170 ITA s 11(cA) ................................................................................................. 170 ITA s 12E(4) .................................................................................................. 171 ITA s 23, preamble ........................................................................................ 172 ITA s 23(k) .................................................................................................... 172 ITA 4th Sch para 1, preamble ......................................................................... 173 ITA 4th Sch para 1 sv ‘employee’ .................................................................. 173 ITA 4th Sch para 2(1A) .................................................................................. 173 ITA 4th Sch para 11(a) ................................................................................... 174 ITA 6th Sch para 3 ......................................................................................... 174 ITA s 1(1) sv ‘income’ .................................................................................. 180 ITA s 1(1), preamble ..................................................................................... 182 ITA s 66(13B) ................................................................................................ 182 ITA s 20(2) .................................................................................................... 182 ITA s 103(2) ................................................................................................. 183 ITA S 1(1) sv ‘representative taxpayer’, proviso ........................................... 184 ITA s 1(1) sv ‘representative taxpayer’, para (c) ........................................... 184 ITA s 1(1) sv ‘capital gain’ .......................................................................... 184

Section 7(1) .................................................................................................... 185 ITA s 7(1) ...................................................................................................... 185



ITA s 1(1) sv ‘income’ .................................................................................. 186 Section 7(2), (2A), (2B), (2C) ........................................................................ 187

ITA s 7(2) ...................................................................................................... 187 ITA s 7(2A) ................................................................................................... 188 ITA s 7(2B) ................................................................................................... 189 ITA s 7(2C) ................................................................................................... 189 ITA s 1(1) sv ‘taxable income’ ...................................................................... 192 CA s 17 .......................................................................................................... 193

Section 7(3), (4) .............................................................................................. 193 ITA s 7(3) ...................................................................................................... 193 ITA s 7(4) ...................................................................................................... 193

Section 7(5) .................................................................................................... 195 ITA s 7(5) ...................................................................................................... 195

Section 7(6) .................................................................................................... 196 ITA s 7(6) ...................................................................................................... 196

Section 7(7) .................................................................................................... 197 ITA s 7(7) ...................................................................................................... 197

Section 7(8) .................................................................................................... 199 ITA s 7(8)(a) .................................................................................................. 199 ITA s 7(8)(b) .................................................................................................. 199

Section 7(9), (10), (11) ................................................................................... 200 ITA s 7(9) ...................................................................................................... 200 ITA s 7(10) .................................................................................................... 200 ITA s 7(11) .................................................................................................... 201 PFA s 37D(1)(d), (e) .................................................................................... 202

Paragraph 68, 8th Sch ...................................................................................... 203 ITA 8th Sch para 68(1) ................................................................................... 203 ITA 8th Sch para 68(2 .................................................................................... 203

Paragraph 69, 8th Sch ...................................................................................... 205 ITA 8th Sch para 69 ........................................................................................ 205 CA s 17 .......................................................................................................... 206

Paragraph 70, 8th Sch ...................................................................................... 207 ITA 8th Sch para 70 ........................................................................................ 207

Paragraph 71, 8th Sch ...................................................................................... 208 ITA 8th Sch para 71 ........................................................................................ 208

Paragraph 72, 8th Sch ...................................................................................... 209 ITA 8th Sch para 72 ........................................................................................ 209 ITA 8th Sch para 73(2) ................................................................................... 211

Paragraph 73, 8th Sch ...................................................................................... 212 ITA 8th Sch para 73(1) ................................................................................... 212 ITA 8th Sch para 73(2) ................................................................................... 213 ITA s 1(1) sv ‘gross income’, preamble ........................................................ 218

Section 25B(1), (2) ......................................................................................... 221 ITA s 25B(1).................................................................................................. 221 ITA s 25B(2).................................................................................................. 221 ITA s 1(1) sv ‘representative taxpayer’, proviso ........................................... 223

Section 25B(3), (4), (5), (6), (7) ..................................................................... 223 ITA s 25B(3).................................................................................................. 223 ITA s 25B(4).................................................................................................. 223



ITA s 25B(5) ................................................................................................. 223 ITA s 25B(6) ................................................................................................. 224 ITA s 25B(7) ................................................................................................. 224 ITA 8th Sch para 2(1) ..................................................................................... 226 ITA s 26A ...................................................................................................... 226 ITA 8th Sch para 11(1)(d) .............................................................................. 227

Paragraph 80, 8th Sch ...................................................................................... 229 ITA 8th Sch para 80(1) ................................................................................... 229 ITA 8th Sch para 80(2) ................................................................................... 229 ITA s 1(1) sv ‘gross income’, para (a) .......................................................... 236 ITA s 10(2) .................................................................................................... 236 ITA s 20(2A) ................................................................................................. 237 ITA 8th Sch para 11(1)(d) .............................................................................. 238 ITA s 1(1) sv ‘trading stock’ ........................................................................ 239 ITA 8th Sch para 1 sv ‘value shifting arrangement’ ..................................... 242 ITA 8th Sch para 11(1)(g) .............................................................................. 242 ITA 8th Sch para 37 ....................................................................................... 242 ITA s 1(1) sv ‘resident’, extract ..................................................................... 245

Section 25B(2A) ............................................................................................. 248 ITA s 25B(2A)............................................................................................... 248

Paragraph 80(3), 8th Sch ................................................................................. 252 ITA 8th Sch para 80(3) ................................................................................... 252 TPCA s 9(1) ................................................................................................... 254 TPCA s 9(2) ................................................................................................... 254 ITA s 55(1) sv ‘donation’ ............................................................................. 269 ITA s 58(1) ................................................................................................... 269 ITA s 55(1), preamble .................................................................................. 275 ITA s 55(1) sv ‘donation’ ............................................................................. 276 ITA s 56(1)(l) ................................................................................................ 276 ITA s 64D sv ‘beneficial owner’ ................................................................... 276 GN 506 GG 37767 of 25 June 2014 para 1 .................................................... 277 ITA 4th Sch para 15(1) ................................................................................... 279 ITA 4th Sch para 1 sv ‘employee’, extract ..................................................... 279 ITA 7th Sch para 1 sv ‘associated institution’ ................................................ 281 ITA 7th Sch para 16 ....................................................................................... 281

Chapter 1—The tax base: charging provision


CHAPTER 1

The tax base

Normal tax: the charging provision

What is ‘normal tax’? After generations of being the subject-matter of a hidden definition in s 5(1) of the Income Tax Act, ‘normal tax’ is now the subject-matter of a truly silly place-keeping definition in s 1(1):

Section 1(1) sv ‘normal tax’, s 5(1)

From the Act 1—‘normal tax’ (ss 1(1), 5(1))

Definition

ITA s 1(1) sv ‘normal tax’

‘[N]ormal tax’ means income tax referred to in section 5(1); [Act 28 of 2011]

Normal tax: the charging provision

ITA s 5(1)

Levy of normal tax and rates thereof 5. (1) Subject to the provisions of the Fourth Schedule [PAYE and provisional tax]

there shall be paid annually for the benefit of the National Revenue Fund, an income tax (in this Act referred to as the normal tax) in respect of the taxable income received by or accrued to or in favour of—

(a) …[Deleted.]; [Act 30 of 2002]

(b) …[Deleted.]; [Act45 of 2003]

(c) any person (other than a company) during the year of assessment ended the last day of February each year; and

[Act 45 of 2003] (d) any company during every financial year of such company.

[Act 103 of 1976]

Defined terms—see s 1(1) Tax, this Act, normal tax, taxable income, person, company, year of assessment, financial year.



Commentary 1—ss 1(1), 5(1): significance of ‘normal tax’

Normal tax as income tax The first absurdity is that s 1(1) defines ‘normal tax’ as the income tax referred to in s 5(1), which provides for an income tax to be known as the normal tax! Why is it necessary to refer to income tax?

Then the characterization by these provisions of the normal tax as an income tax is needlessly confusing, especially since, with the advent of the so-called capital gains tax (CGT), income must be taken in an economist’s sense, of any increment to wealth, whether of a revenue or a capital nature. Most taxpayers refer rather to income tax in contradistinction to the capital gains tax, but, in fact, there are no such taxes; there is only the normal tax. Nevertheless, there is a real difference between effective rates of normal tax under the so-called income tax system and effective rates under the so-called capital gains tax system.

And, popular usage notwithstanding, the proper term for the tax imposed by s 5(1), the formal charging provision, is the ‘normal tax’, no matter what its components.

The subject to clause In the typical arse-about-face drafting style of fiscal statutes, s 5(1) commences with the reservation Subject to the provisions of the Fourth Schedule. In their classical application, such subject-to clauses render the provision in which they appear subservient or subordinate to the cross-referenced provision (97 TSH 2011). In this application, what the subject-to clause signifies is that the subordinate rule is that normal tax is to be paid annually. For the dominant rule, see the Fourth Schedule to the Income Tax Act and its PAYE and provisional tax payment rules. In fact, though, PAYE and provisional tax are separate taxes in their own right (43 TAW 2014).

Normal tax and the rebates A huge deficiency of the definition of ‘normal tax’ is that it fails to make any reference to the rebates. Because these, in their terms, are deductible from the normal tax payable, it is submitted that the true meaning of ‘normal tax’ is the amount remaining after the deduction of all deductible rebates. Thus, on the several occasions on which the act refers to the normal tax chargeable—for example, in the First Schedule to the act, on the computation of taxable income derived from pastoral, agricultural or other farming operations—what is indicated is the net normal tax payable after deduction of all rebates. The point is made explicit in para 20 of the Fourth Schedule, relating to the provisional tax (which refers to the normal tax payable rather than the normal tax chargeable).

What follow are all those parts of the normal tax rebates providing for their deduction from normal tax:

ITA s 6(1)

Normal tax rebates 6. (1) There shall be deducted from the normal tax payable by any natural person,

other than normal tax in respect of any retirement fund lump sum benefit, retirement



fund lump sum withdrawal benefit or severance benefit, an amount equal to the sum of the amounts allowed to the taxpayer by way of rebates under [s 6(2)].

[Act 24 of 2011]

ITA s 6A(1)

Medical scheme fees tax credit 6A. (1) A rebate, to be known as the medical scheme fees tax credit, must be

deducted from the normal tax payable by a person who is a natural person. [Act 31 of 2013]

ITA s 6B(2)

(2) A rebate, to be known as the additional medical expenses tax credit, must be deducted from the normal tax payable by a person who is a natural person.

[Act 22 of 2012]

ITA s 6quat(1), extract

Rebate or deduction in respect of foreign taxes on income 6quat. (1) Subject to [s6 quat(2)], where the taxable income of any resident during a

year of assessment includes— …, there must be deducted from the normal tax payable in respect of that taxable income

a rebate determined in accordance with this section. [Act 24 of 2011]

ITA s 6quin(1), extract

Rebate in respect of foreign taxes on income from source within Republic

6quin. (1) Subject to subsections (3) and (3A), where any portion of the taxable income of a resident is attributable to an amount that is from a source within the Republic and is received by or accrued to that resident in respect of services rendered within the Republic, and an amount of tax in respect of that amount is—

…, a rebate determined in accordance with [s 6quin(2)] must be deducted from the

normal tax payable by that resident. [Act 22 of 2012]

There is one further rebate to be found in the act but it is deductible not from normal tax but the dividends tax payable:

ita s 64N(1)

Rebate in respect of foreign taxes on dividends 64N. (1) A rebate determined in accordance with this section must be deducted from

the dividends tax payable in respect of a dividend contemplated in paragraph (b) of the definition of ‘dividend’ in section 64D.

[Act 17 of 2009]

Annually means during the year of assessment Although s 5(1) ostensibly imposes the normal tax annually, that term is made precise by the references in s 5(1)(c) to the year of assessment of persons other than companies—referred to here as unincorporated persons—and in s 5(1)(d)



to the year of assessment of companies.

Drafting error Sadly, the draftsperson of the formal (albeit place-keeping) definition of ‘normal tax’ missed the opportunity of separating definitional from substantive provisions, leaving it to the user to do the work for which the draftsperson alone was paid. To add to the confusion, s 5 as a whole is hopelessly confused in its terminology, referring to tax paid, charged and assessed, all of which signify the imposition of a tax. Since s 5 is technically known as a charging provision, perhaps the imposition of a tax is best referred to as the charging of that tax.

On this basis, what s 5(1) achieves, in its substantive role, is to charge all persons (comprising persons other than companies and companies) with a liability for the normal tax upon an annual basis, the tax base being the taxable income derived by (a very common elegant variation for received by or accrued to or in favour of, to be found throughout the act) such persons annually.

And, at the definitional level, the normal tax is the tax charged by s 5(1).

Section 1(1) sv ‘year of assessment’

From the Act 2—‘year of assessment’ (s 1(1))

Definition

ITA s 1(1) sv ‘year of assessment’

‘[Y]ear of assessment’ means any year or other period in respect of which any tax or duty leviable under this Act is chargeable, and any reference in this Act to any year of assessment ending the last or the twenty-eighth or the twenty-ninth day of February shall, unless the context otherwise indicates, in the case of a company or a portfolio of a collective investment scheme in securities be construed as a reference to any financial year of that company or portfolio ending during the calendar year in question.

[Act 17 of 2009

Defined terms—see s 1(1) Tax, this Act, year of assessment, company, financial year.

Commentary 2—ss 1(1), 5(1): significance of ‘year of assessment’

Years of assessment The definition of ‘year of assessment’ caters for broken periods of less than a year and maps February year-ends on to calendar years for the benefit of a company and a portfolio of a collective investment scheme in securities.

While companies thus generally have years of assessment coincident with their financial years, unincorporated persons are compelled by s 5(1) generally to have years of assessment ending on the last day of February each year.

Chapter 1—The tax base: tax base


Normal tax: the tax base

What is the tax base for the normal tax? Classically, a charging provision does three things: (1) impose the tax; (2) identify the tax base; and (3) finger the victims. Seemingly simply, the tax base is identified as the ‘taxable income’ derived by a victim. It turns out, however, that ‘taxable income’ is anything but simple.

More formally stated, the imposition of the normal tax falls upon unincorporated persons and upon companies. It is charged over a year of assessment, which need not consist in a full set of twelve months. The tax base is the taxable income derived by any entity liable to its imposition:

Section 1(1) sv ‘taxable income’

From the Act 3—‘taxable income’ (s 1(1))

Definition

ITA s 1(1) sv ‘taxable income’

‘[T]axable income’ means the aggregate of— (a) the amount remaining after deducting from the income of any person all the

amounts allowed under Part I [Normal tax] of Chapter II [The taxes] to be deducted from or set off against such income; and

(b) all amounts to be included or deemed to be included in the taxable income of any person in terms of this Act;

[Act 5 of 2001]

Defined terms—see s 1(1) Income, person, taxable income, this Act

Commentary 3—s 1(1): significance of ‘taxable income’

Computational and inclusional taxable income Thus taxable income consists of two components:

Paragraph (a) of the definition: computational taxable income. Paragraph (b) of the definition: inclusional taxable income (the

plug-ins).

Computational taxable income is so called here because it results from a downwards-cascading calculation, proceeding in the following fashion:

Gross income → Income → Taxable income

Inclusional taxable income is made up of several plug-ins, so-called



here because they directly affect, are added to, or are plugged into taxable income, with no impact whatsoever on the usual computational steps, bypassing gross income and income altogether. Thus an amount constituting a plug-in is to be found in taxable income but not in gross income.

The distinction is critical to an understanding of the act, since, while the imposition of normal tax is dependent upon taxable income, gross income serves as a determinant of other issues. For example, a dividend is included in gross income but, if it is exempt, does not reach taxable income in the computational cascade.

Commentary 4—s 5(1): the tax base

Taxable income for the year of assessment Under s 5(1), the normal tax is charged on the taxable income of unincorporated persons and of companies:





[Act 5 of 2001]

Computational taxable income Computational ‘taxable income’, under para (a) of the definition of that term, is what remains of ‘income’ after the deduction of all allowances:

ITA s 1(1) sv ‘income’

‘[I]ncome’ means the amount remaining of the gross income of any person for any year or period of assessment after deducting therefrom any amounts exempt from normal tax under Part I [Normal tax] of Chapter II [The taxes];

(Drafting error: The definition superfluously refers to a period of assessment, meaning a period other than a year, a concept already catered for by the definition of ‘year of assessment’ in s 1(1).)

At this stage, computational ‘taxable income’, under para (a) of the definition, is what remains of income after the deduction of all allowances, which is what remains of gross income after the deduction of all exempt amounts. Thus the prime determinant of computational taxable income is gross income.

Inclusional taxable income Inclusional ‘taxable income’, under para (b) of the definition, also referred to as the plug-ins to taxable income, may be established only by a search of the entire act. The following provisions include amounts in taxable income or deem



amounts to be included in taxable income;

Section 8(1)(a)(i): Allowances or advances included in taxable income. Section 26A: Inclusion of taxable capital gain in taxable income. Section 45(4)(b): Intra-group transactions. Section 48C: Transitional provisions; registered micro business. Section 22(1): Inclusion in taxable income of closing trading stock. Section 22(2): Deduction from taxable income of opening trading stock.

Defining the tax base—I: computational taxable income Liability for the normal tax on account of computational taxable income springs from the concept of gross income, which is determined upon a worldwide basis for residents and upon a source-based basis for nonresidents:

Section 1(1) sv ‘gross income’

From the Act 4—‘gross income’, preamble (s 1(1))

Definition

ITA s 1(1) sv ‘gross income’, preamble

‘[G]ross income’, in relation to any year or period of assessment, means— (i) in the case of any resident, the total amount, in cash or otherwise, received by

or accrued to or in favour of such resident; or (ii) in the case of any person other than a resident, the total amount, in cash or

otherwise, received by or accrued to or in favour of such person from a source within the Republic,

[Act 22 of 2012] during such year or period of assessment, excluding receipts or accruals of a capital

nature, but including, without in any way limiting the scope of this definition [of ‘gross income’ in s 1(1)], such amounts (whether of a capital nature or not) so received or accrued as are described hereunder, namely…;

Defined terms—see s 1(1) Year of assessment, resident, person, Republic

Commentary 5—s 1(1): ‘gross income’, structure of

Computational taxable income—chargeable period Like the charging provision, s 5(1), the preamble to the definition focuses on the year of assessment, more specifically, on targeted amounts derived during a year of assessment.

Computational taxable income—chargeable amount (1) The amounts targeted are described as the total amount, in cash or otherwise, received by or accrued to or in favour of chargeable entities, more simply



referred to (a great number of times in the act itself) as amounts derived by such persons.

Specifically excluded are receipts or accruals of a capital nature. Specifically included are the amounts described in paras (a) to (n) of the

definition, which are colloquially known as the special inclusions in gross income.

Computational taxable income, with its downwards-cascading calculation, may thus be depicted in the following, expanded fashion:

Receipts & accruals – Capital receipts & accruals + Special inclusions = Gross income – Exempt amounts = Income – Allowable deductions = Taxable income

Since allowance still has to be made for the plug-ins to taxable income, the output even of this expanded algorithm is by no means equivalent to ‘taxable income’ as defined. Nevertheless, because it is based upon gross income, it is the part of gross income that most easily may be analysed for its territorial implications.

The implication is that the territorial implications of the plug-ins have perforce to be separately analysed.

Computational taxable income—chargeable entities Section 5(1) imposes the normal tax upon unincorporated persons and upon companies. The definition of ‘gross income’ addresses residents and persons other than residents, referred to here simply as nonresidents.

Although the sets (Unincorporated persons + Companies) and (Residents + Nonresidents) might be expected to be universal and even equivalent, in principle, at least, gross income is a critical determinant of the imposition of computational taxable income, to the extent that:

An entity will win exclusion from the normal tax in its entirety if it is not an unincorporated person and is not a company.

An entity will win exclusion from liability to the imposition of the normal tax on computational taxable income if it is neither a resident nor a nonresident.

Computational taxable income—chargeable amount (2) Under para (i) of the definition of ‘gross income’, the tax base for a resident is:

ITA s 1(1) sv ‘gross income’, para (i)

(i) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident; or

And, for a nonresident, it is:

ITA s 1(1) sv ‘gross income’, para (ii)

(ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within the Republic,

[Act 22 of 2012]



In other words, the gross income of a resident is determined without qualification of any sort, that is, upon a worldwide basis:

Receipts & accruals (worldwide) – Capital receipts & accruals + Special inclusions = Gross income – Exempt amounts = Income – Allowable deduc-tions = Taxable income

But the gross income of a nonresident is constrained, being limited to receipts and accruals derived from a source within the Republic:

Receipts & accruals (from source in Republic) – Capital receipts & accruals + Special inclusions = Gross income – Exempt amounts = Income –Allowable deductions = Taxable income

Source of receipts and accruals The source of a receipt or an accrual is determined in the first instance under s 9, and, to the extent that s 9 is inapplicable, under the common law.

Drafting error The preamble to the definition of ‘gross income’, like that of ‘income’, superfluously refers to a period of assessment, meaning a period other than a year, a concept already catered for by the definition of ‘year of assessment’ in s 1(1).

Inclusion in gross income of inclusions in income A critical provision, especially in relation to the concept of source, is para (n) of the definition of ‘gross income’ in s 1(1):

Section 1(1) sv ‘gross income’, para (n)

From the Act 5—‘gross income’, para (n) (s 1(1))

Definition

ITA s 1(1) sv ‘gross income’, para (n)

(n) any amount which in terms of any other provision of this Act is specifically required to be included in the taxpayer’s income and that amount must—

(i) for the purposes of this paragraph [para (n) of the definition of ‘gross income’ in s 1(1)] be deemed to have been received by or to have accrued to the taxpayer; and

(ii) in the case of any amount required to be included in the taxpayer’s income in terms of section 8(4), be deemed to have been received or accrued from a source within the Republic notwithstanding that such amounts may have been recovered or recouped outside the Republic:

[Act 32 of 2005]

Defined terms—see s 1(1) This Act, taxpayer, income, gross income, Republic.



Commentary 6—s 1(1): para (n) of ‘gross income’

All inclusions in income are inclusions in gross income It is a mystery why inclusions are made in income when they are in any event going to be deemed to be inclusions in ‘gross income’ by para (n) of the definition. Why not simply identify them as inclusions in gross income?

Nevertheless, one consequence of para (n) is that all provisions making specific inclusions in income are, by virtue of their automatic inclusion in gross income, also subject to the source rules embedded in the preamble to the definition of ‘gross income’.

Defining the tax base—II: inclusional taxable income To repeat: The tax under consideration is the normal tax. Its imposition falls upon unincorporated persons and upon companies. It is charged over a year of assessment, which need not consist in a full set of twelve months. The tax base is the taxable income derived by any entity liable to its imposition:





[Act 5 of 2001]

Thus ‘taxable income’ consists in two components:

Paragraph (a) of the definition: computational taxable income. Paragraph (b) of the definition: inclusional taxable income (the

plug-ins).

Liability for the normal tax on account of computational taxable income springs from the concept of gross income, which is determined upon a worldwide basis for residents and upon a source-based basis for nonresidents.

By contrast, liability for the normal tax on account of inclusional taxable income springs from specific inclusions in taxable income, the full list of which appears to be as follows:

Section 8(1)(a)(i): Allowance or advances included in taxable income.

Section 26A: Inclusion of taxable capital gain in taxable income.



Section 45(4)(b): Intra-group transactions. Section 48C: Transitional provisions—registered micro business. Section 22(1): Inclusion in taxable income of closing trading stock. Section 22(2): Deduction from taxable income of opening trading

stock. Section 26: Determination of taxable income derived from farming.

Of these, the following instances are the most significant, and are dealt with separately below:

Section 8(1)(a)(i): The taxable allowances plug-in. Section 26A: The taxable capital gain plug-in. Section 22(1), (2): The trading stock plug-ins.

1. The taxable allowances plug-in Section 8 is notoriously difficult to interpret, and nowhere more so than in 8(1)(a)(i):

Section 8(1)(a)(i)

From the Act 6—the taxable allowances plug-in (s 8(1)(a)(i))

Inclusion in taxable income—1

ITA s 8(1)(a)(i)

Certain amounts to be included in income or taxable income 8. (1)(a)(i) There shall be included in the taxable income of any person (hereinafter

referred to as the ‘recipient’) for any year of assessment any amount which has been paid or granted during that year by his or her principal as an allowance or advance, excluding any portion of any allowance or advance actually expended by that recipient—

[Act 74 of 2002] (aa) on travelling on business, as contemplated in [s 8(1)(b)], unless an allowance

or advance has been granted by an employer in respect of the use of a motor vehicle as contemplated in paragraph 7 of the Seventh Schedule [Fringe benefits];

[Act 7 of 2010] (bb) on any accommodation, meals and other incidental costs, as contemplated in

[s 8(1)(c)], while such recipient is by reason of the duties of his or her office or employment obliged to spend at least one night away from his or her usual place of residence in the Republic; or

(cc) by reason of the duties attendant upon his or her office, as contemplated in [s 8(1)(d)].

[Act 74 of 2002]

Defined terms—see s 1(1) Taxable income, person, year of assessment, Republic.



Commentary 7—s 8(1)(a)(i): the taxable allowances plug-in

Inclusional taxable income—residents Although residents are chargeable upon their gross income from a worldwide source, the s 8(1)(a)(i) inclusion is in taxable income, not gross income. In fact, the residence of a recipient under s 8(1)(a)(i) is irrelevant, the pertinent questions being:

Is the recipient a ‘person’ (s 1(1)) capable of being charged normal tax on inclusional taxable income?

Is the recipient paid or granted an allowance or advance susceptible to the application of s 8(1)(a)(i)?

ITA s 1(1) sv ‘taxable income’, para (b)

‘[T]axable income’ means the aggregate of— (b) all amounts to be included or deemed to be included in the taxable income of

any person in terms of this Act; [Act 5 of 2001]

Inclusional taxable income—nonresidents How, then, are nonresidents to be treated? There is no adequate formal answer to this question. The implication is that a nonresident will suffer an inclusion under s 8(1)(a)(i) only if the allowance or advance concerned is derived from a source within the Republic under s 9 and the common law. What is odd about this proposed solution is that the source of a receipt or an accrual is relevant only to gross income, and not to taxable income.

2. The taxable capital gain plug-in On its face, s 26A appears to be of worldwide application. It is only when you follow its lead to the Eighth Schedule to the act that you discover that a taxable capital gain has territorial connotations, more specifically, in para 2.

Section 26A

From the Act 7—the taxable capital gain plug-in (s 26A)


ITA s 26A

Inclusion of taxable capital gain in taxable income 26A. There shall be included in the taxable income of a person for a year of

assessment the taxable capital gain of that person for that year of assessment, as determined in terms of the Eighth Schedule [CGT].

[Act 5 of 2001]

Defined terms—see s 1(1) Taxable income, person, year of assessment.



Commentary 8—s 26A: the taxable capital gain plug-in

Inclusional taxable income—taxable capital gains By virtue of s 26A, a taxable capital gain is included in ‘taxable income’ under para (b) of the definition of that term:

ITA s 1(1) sv ‘taxable income’, para (b)

‘[T]axable income’ means the aggregate of— (b) all amounts to be included or deemed to be included in the taxable income of

any person in terms of this Act; [Act 5 of 2001]

But before such an inclusion may be effected, s 26A requires the taxable capital gain to be determined under the Eighth Schedule. The first step towards such a determination is to be found in para 2 of the Eighth Schedule.

Paragraph 2, 8th Sch

From the Act 8—application of the CGT (para 2, 8th Sch)

The CGT tax base

ITA 8th Sch para 2(1)

Application 2. (1) Subject to paragraph 97, this Schedule [Eighth Schedule; CGT] applies to the

disposal on or after valuation date of— (a) any asset of a resident; and (b) the following assets of a person who is not a resident, namely— (i) immovable property situated in the Republic held by that person or any

interest or right of whatever nature of that person to or in immovable property situated in the Republic; or

(ii) any asset which is attributable to a permanent establishment of that person in the Republic.

[Act 32 of 2004]

ITA 8th Sch para 2(2)

(2) For purposes of [para 2(1)(b)(i)], an interest in immovable property situated in the Republic includes any equity shares held by a person in a company or ownership or the right to ownership of a person in any other entity or a vested interest of a person in any assets of any trust, if—

(a) 80 per cent or more of the market value of those equity shares, ownership or right to ownership or vested interest, as the case may be, at the time of disposal thereof is attributable directly or indirectly to immovable property held otherwise than as trading stock; and

[Act 31 of 2005] (b) in the case of a company or other entity, that person (whether alone or together

with any connected person in relation to that person), directly or indirectly,



holds at least 20 per cent of the equity shares in that company or ownership or right to ownership of that other entity.

[Act 7 of 2010]

Defined terms—see s 1(1) Resident, person, Republic, permanent establishment, trust, trading stock, connected person.

Commentary 9—para 2(1), 8th Sch: territoriality of the CGT

Inclusional taxable income—residents According to para 2(1)(a) of the Eighth Schedule, the schedule applies to all disposals of assets by residents. In other words, for residents, the CGT is of worldwide application.

Inclusional taxable income—nonresidents But, for nonresidents, the application of the schedule is limited by para (1)(b) to the disposal of targeted assets only:

Immovable property situated in the Republic held by that person. An interest or right of whatever nature of that person to or in immovable

property situated in the Republic. An asset which is attributable to a permanent establishment of that person

in the Republic.

Just what is an interest in immovable property situated in the Republic for this purpose is set out in para 2(2).

In more colloquial language, the application of the CGT to nonresidents is triggered by the disposal by a nonresident of:

Immovable property in the Republic held directly. Immovable property in the Republic held indirectly through a targeted

interest. The assets of a branch (permanent establishment) in the Republic.

3. The trading stock plug-in Section 22(1) and (2) call for specified amounts to be taken into account, without saying in what manner they are to be taken into account. Both from ancient practice and the case law, it is clear, nevertheless, that, in the determination of the taxable income for a particular year of assessment, an amount relating to the trading stock at the end of the year—the so-called closing stock—is added to taxable income, while an amount relating to the trading stock at the beginning of the year—the so-called opening stock—is deducted from taxable income.



Section 22(1), (2)

From the Act 9—the trading stock plug-in (s 22(1), (2))


ITA s 22(1)

Amounts to be taken into account in respect of values of trading stocks 22. (1) The amount which shall, in the determination of the taxable income derived

by any person during any year of assessment from carrying on any trade (other than farming), be taken into account in respect of the value of any trading stock held and not disposed of by him at the end of such year of assessment, shall be—

(a) in the case of trading stock other than trading stock contemplated in [s 22(1)(b)], the cost price to such person of such trading stock, less such amount as the Commissioner may think just and reasonable as representing the amount by which the value of such trading stock, not being any financial instrument, has been diminished by reason of damage, deterioration, change of fashion, decrease in the market value or for any other reason satisfactory to the Commissioner; and

[Act 7 of 2010] (b) in the case of any trading stock which consists of any instrument, interest rate

agreement or option contract in respect of which a company has made an election which has taken effect as contemplated in section 24J(9), the market value of such trading stock as contemplated in such section [s 24J(9)].

[Act 53 of 1999]

ITA s 22(2)

(2) The amount which shall in the determination of the taxable income derived by any person during any year of assessment from carrying on any trade (other than farming), be taken into account in respect of the value of any trading stock held and not disposed of by him at the beginning of any year of assessment, shall—

(a) if such trading stock formed part of the trading stock of such person at the end of the immediately preceding year of assessment be the amount which was, in the determination of the taxable income of such person for such preceding year of assessment, taken into account in respect of the value of such trading stock at the end of such preceding year of assessment; or

(b) if such trading stock did not form part of the trading stock of such person at the end of the immediately preceding year of assessment, be the cost price to such person of such trading stock.

Defined terms—see s 1(1) Taxable income, person, year of assessment, trade, Commissioner, financial instrument, instrument.

Commentary 10—s 22(1), (2): the trading stock plug-in

Inclusional taxable income—residents Residents might have a worldwide gross income; their taxable income is not specifically made so pervasive. But there is no territorial restriction whatsoever



placed upon taxable income derived from carrying on any trade (other than farming) targeted by s 22. It follows that the trading stock plug-in is operational wherever in the world a resident carries on a trade.

Inclusional taxable income—nonresidents How, then, are nonresidents to be treated? There is no adequate formal answer to this question. The implication is that a nonresident will only suffer an inclusion or an effective deduction under s 22 if the trade being carried on leads to taxable income derived from receipts and accruals arising from a source within the Republic under s 9 and the common law. What is odd about this proposed solution is that the source of a receipt or an accrual is relevant only to gross income, and not to taxable income.

The terms of s 20(1)(b), on cross-border assessed losses, possibly add credence to the suggestion made here.

A final word on the tax base For residents, then, the normal tax is a worldwide tax, imposed upon both computational and inclusionary taxable income.

Nonresidents may derive a computational taxable income, but only if it springs from gross income having a source in the Republic. The inclusionary taxable income of a nonresident is clear when what is at stake is the taxable capital gain plug-in, since a nonresident is liable to normal tax on a taxable capital gain to the extent of such a plug-in only, which is intimately connected with specifically targeted activities in the Republic, the remainder of the Eighth Schedule being irrelevant. The other plug-ins are not specifically dealt with, and they somehow have to be accommodated by a not very satisfactory application or pseudo-application of the common-law and s 9 principles of source.

In very broad terms, it may be said that, while residents may derive a worldwide taxable income, with the result that foreign income, inclusive of taxable capital gains, must all be accounted for, nonresidents may ignore foreign income and focus solely upon (a) source-based gross income, leading to taxable income; (b) a limited exposure to the CGT, by virtue of a restricted, Republic-based range of taxable capital gains; and (c) a sort of source-based exposure to the other plug-ins to taxable income.

What is the ‘Republic’? Within the context of the tax base of the normal tax, the definition of ‘Republic’ is unimportant to residents but critical for nonresidents.



Section 1(1) sv ‘Republic’

From the Act 10—‘Republic’ (s 1(1))

Definition

ITA s 1(1) sv ‘Republic’

‘Republic’ means the Republic of South Africa and, when used in a geographical sense, includes the territorial sea thereof as well as any area outside the territorial sea which has been or may be designated, under international law and the laws of South Africa, as areas within which South Africa may exercise sovereign rights or jurisdiction with regard to the exploration or exploitation of natural resources;

[Act 20 of 2006]

Commentary 11—s 1(1): significance of ‘Republic’

Identificatory meaning The definition identifies the country indicated by “Republic’: it is the Republic of South Africa.

Geographical meaning The remainder of the definition is significant as much for what it says as for what it does not say. Effectively, it refers to the components of South Africa:

Its landmass. This is established by international law (Lesotho willing). Its territorial sea. Its non-territorial seas over which South Africa enjoys sovereign rights or

jurisdiction over the exploration or exploitation of natural resources. This is established under both domestic and international law.

Both the territorial and non-territorial seas are identified by the Maritime Zones Act:

MZA S 4

Territorial waters 4. (1) The sea within a distance of twelve nautical miles from the baselines shall be

the territorial waters of the Republic. (2) Any law in force in the Republic, including the common law, shall also apply in

its territorial waters and the airspace above its territorial waters. (3) The right of innocent passage shall exist in the territorial waters.

MZA S 5

Contiguous zone 5. (1) The sea beyond the territorial waters referred to in section 4, but within a

distance of twenty four nautical miles from the baselines, shall be the contiguous zone of the Republic.



(2) Within the contiguous zone and the airspace above it, the Republic shall have the right to exercise all the powers which may be considered necessary to prevent contravention of any fiscal law or any customs, emigration, immigration or sanitary law and to make such contravention punishable.

MZA S 6

Maritime cultural zone 6. (1) The sea beyond the territorial waters referred to in section 4, but within a

distance of twenty four nautical miles from the baselines, shall be the maritime cultural zone of the Republic.

(2) Subject to any other law the Republic shall have, in respect of objects of an archaeological or historical nature found in the maritime cultural zone, the same rights and powers as it has in respect of its territorial waters.

MZA S 7

Exclusive economic zone 7. (1) The sea beyond the territorial waters referred to in section 4, but within a

distance of two hundred nautical miles from the baselines, shall be the exclusive economic zone of the Republic.

(2) Subject to any other law the Republic shall have, in respect of all natural resources in the exclusive economic zone, the same rights and powers as it has in respect of its territorial waters.

MZA S 8

Continental shelf 8. (1) The continental shelf as defined in Article 76 of the United Nations

Convention on the Law of the Sea, 1982, adopted at Montego Bay on 10 December 1982, shall be the continental shelf of the Republic.

(2) Subject to any other law the outer limits of the continental shelf shall consist of a series of straight lines joining the co-ordinates mentioned in Schedule 3.

(3) For the purposes of— (a) exploration and exploitation of natural resources, as defined in paragraph 4

of Article 77 of the United Nations Convention on the Law of the Sea, 1982; and

(b) any law relating to mining of precious stones, metals or minerals, including natural oil,

the continental shelf shall be deemed to be unalienated State land.

Chapter 1—The tax base: imposition


Normal tax: imposition

Entities liable to normal tax Section 5(1) identifies the following entities as being liable for the normal tax:

Section 5(1)(c): Any person, other than a company, referred to here as an unincorporated person.

Section 5(1)(d): Any company during every financial year of such company.

Section 1(1) sv ‘person’

From the Act 11—‘person’ (s 1(1))

Definition

ITA s 1(1) sv ‘person’

‘[P]erson’ includes— (a) an insolvent estate; (b) the estate of a deceased person; (c) any trust; and

[Act 7 of 2010] (d) any portfolio of a collective investment scheme,

[Act 22 of 2012] but does not include a foreign partnership;

[Act 7 of 2010]

Defined terms—see s 1(1) Insolvent estate, person, trust, foreign partnership.

Commentary 12—s 1(1): significance of ‘person’

Person ‘includes’ On the meaning of includes as used in statutes, see 135 TSH 2014.

As used here, in the definition of ‘person’ in s 1(1) of the Income Tax Act, includes is clearly intended to expand the meaning of person. In other words, the definition is not exhaustive.

The next step is to decide whether anything prohibits the application in this context of s 1 of the Interpretation Act; in other words whether the identification of what is a person in the Income Tax Act relies upon the definition of ‘person’ in s 2 of the Interpretation Act, and, if so, to what extent:

IA s 2 sv ‘person’

Definitions 2. The following words and expressions shall, unless the context otherwise requires

or unless in the case of any law it is otherwise provided therein, have the meanings



hereby assigned to them respectively, namely— ‘[P]erson’ includes— (a) any divisional council, municipal council, village management board, or like

authority; (b) any company incorporated or registered as such under any law; (c) any body of persons corporate or unincorporate;

Again, as used in this definition, includes is clearly intended to expand the meaning of person, the ordinary meaning of which would include both a natural person and any other entity clothed with legal capacity, such as a company; entities established by statute, such as SARS (under the South African Revenue Service Act); and entities recognized by the common law as enjoying a legal personality separate from that of its members, such as a universitas (De Allende v Baraldi T/A Embassy Drive Medical Centre 2000 (1) SA 390 (T)).

Why, then, does the definition explicitly include companies? A possible answer is that the intention is to make it clear that foreign companies are included (Polaris Capital (Pty) Ltd v Registrar of Companies and Another 2009 (3) SA 207 (C)).

And why does it include a corporate body of persons, otherwise known as a universitas? The answer given below (see the extract from the Tax Shock, Horror newsletter) is that the juxtaposition of incorporated and unincorporated bodies of persons is a matter purely of legislative convenience.

An alternative explanation is that the opening words of s 2 of the Interpretation Act require that each instance of the extension of the meaning of person in paras (a) to (c) of the definition is to be judged for its relevance in relation to the particular statute concerned. For example, under the Income Tax Act, the enquiry would be whether companies were intended to be regarded as ‘persons’ (NST Ferrochrome (Pty) Ltd v CIR 2000 (3) SA 1040 SCA), the answer being, very clearly (see, for example, s 5(1)), that they are.

Under this explanation, the ordinary meaning of person would have to be understood as excluding the entities itemized in paras (a) to (c) of the definition. They are intended to be considered separately in relation to each statute employing person.

In a like manner, it might be asked whether the Income Tax Act encompasses any divisional council, municipal council, village management board, or like authority. The answer must be Yes, since all governmental receipts and accruals are exempted from the normal tax by s 10(1)(a). No exemption would be required if no ‘person’ were involved.

As for incorporated bodies, such as clubs, these are defined as ‘companies’ under para (d) of the definition in s 1(1) and thus are doubly included as ‘persons’, once as entities enjoying legal capacity, and another time as ‘companies’.

What are left are unincorporated bodies of persons, such as partnerships, which are explicitly dealt with in s 24H, and, in the guise of ‘foreign partnerships’ (s 1(1)), are excluded from the definition of a ‘person’ in s 1(1) of the Income Tax Act. It may be deduced, therefore, that, in the context of the Income Tax Act, the inclusion of an unincorporated body as a ‘person’ in s 1 of the Interpretation Act is irrelevant.



Unincorporated persons Being genuinely expansive rather than exhaustive, the definition of ‘person’ relies for the most part upon the ordinary meaning of a person, which, in the context, would be an individual or an entity—not otherwise specified—enjoying legal capacity. In other words, the set of persons other than companies extends far beyond individuals or natural persons, starting with the defined term ‘person’, which, by commencing, whether via the Interpretation Act or entirely independently, with the ordinary meaning of person, includes all entities with legal capacity, including natural persons and companies, and is then extended so as to include the artificial persons listed in paras (a) to (d) of the definition.

Thus an unincorporated person refers to the full set of legally capable entities plus all the artificial persons but excluding companies and foreign partnerships.

A closer analysis of the law suggests that the inclusion of estates and trusts as ‘persons’ serves very limited purposes under the act, perhaps mainly to achieve inclusion under the charging provision (s 5(1)) and the application of appropriate rates of tax. The parties truly significant in relation to such artificial persons are trustees and executors, in their capacity as such. (See the series on artificial persons in 80 TSH 2009, 81 TSH 2009, 83 TSH 2010.)

But then even a ‘company’ might not be quite what you expect, thanks to the complex, extensive definition of the term:

From the Act 12—‘company’ (s 1(1))

Definition

ITA s 1(1) sv ‘company’

‘[C]ompany’ includes— (a) any association, corporation or company (other than a close corporation)

incorporated or deemed to be incorporated by or under any law in force or previously in force in the Republic or in any part thereof, or any body corporate formed or established or deemed to be formed or established by or under any such law; or

[Act 121 of 1984] (b) any association, corporation or company incorporated under the law of any

country other than the Republic or any body corporate formed or established under such law; or

[Act 30 of 2000 (c) any co-operative; or

[Act 20 of 2006] (d) any association (not being an association referred to in paragraph (a) or (f))

[of the definition of ‘company’ in s 1(1)] formed in the Republic to serve a specified purpose, beneficial to the public or a section of the public; or

[Act 30 of 2000 (e) any— (i) …[Deleted.];



[Act 17 of 2009 (ii) portfolio comprised in any investment scheme carried on outside the

Republic that is comparable to a portfolio of a collective investment scheme in participation bonds or a portfolio of a collective investment scheme in securities in pursuance of any arrangement in terms of which members of the public (as defined in section 1 of the Collective Investment Schemes Control Act) are invited or permitted to contribute to and hold participatory interests in that portfolio through shares, units or any other form of participatory interest; or

[Act 31 of 2013 (iii) portfolio of a collective investment scheme in property that qualifies as

a REIT as defined in paragraph 13.1(x) of the JSE Limited Listing Requirements; or

[Act 43 of 2014] (f) a close corporation,

[Act 7 of 2010 but does not include a foreign partnership;

[Act 7 of 2010]

Defined terms—see s 1(1) Company, close corporation, Republic, co-operative, portfolio of a collective investment scheme, Collective Investment Schemes Control Act, REIT, foreign partnership.

Commentary 13—s 1(1): significance of ‘company’

Companies that are certainly ‘companies’, plus an outlier All the entities listed in the definition of a ‘company’, barring one, are identified by law and may thus be classified with as much certainty that the drafting, interpretation and understanding of statutes ordinarily allows. The exception arises under para (d) of the definition:

ITA s 1(1) sv ‘company’, para (d)

‘[C]ompany’ includes— (d) any association (not being an association referred to in paragraph (a) or (f))

[of the definition of ‘company’ in s 1(1)] formed in the Republic to serve a specified purpose, beneficial to the public or a section of the public; or

[Act 30 of 2000

Associations have members. When you are able to sue the members, for example, of a partnership, the association enjoys no legal status separate from that of its members. It is known as an unincorporated body of persons. When you are able to sue the association, rather than its members, for example, a club, you are dealing with an incorporated body of persons, or universitas. Logically, and on the strength of its reference to any association, and not to any members of an association, para (d) of the definition includes within the ranks of ‘companies’ any universitas.

Drafting error Although the definition of a ‘company’ appears to be inclusive rather than

the taxation of trusts - bsp seminars · 2016-02-27 · terms and conditions 5—the taxation of...

Documents